Interview with Poul Thomsen, Deputy Director of the IMF’s European Department and Mission Chief for Greece

Published in Ta Nea, January 26, 2013

Ta Nea: Do you believe that there were any mistakes that happened over the last two years on behalf of the IMF on the Greek, Irish or Portuguese program? For example, research has found that the IMF underestimated the fiscal multipliers. As a protagonist in policy design, what do you think could be done better?

Thomsen: The IMF has put every effort into supporting all the countries that faced financing constraints as part of the European crisis. In the case of Greece, in hindsight, we were too optimistic on forecasting Greece’s recovery, but I would not put this down to under-estimating multipliers. A host of other unrelated and unexpected factors have come into play, including a protracted European crisis and a political crisis in Greece that severely eroded investor confidence and contributed to a far deeper than expected credit crunch, while delaying urgent reforms. The important thing is that when it became apparent that different underlying assumptions were needed, we moved fast to update them.

Ta Nea: The Laffer curve shows that increasing tax rates beyond a certain point will be counterproductive for raising further tax revenue. It is clear that Greece has outgrown this point. The budget is now threatened by the unpaid taxes, as people do not have the money to pay. Are you worried about this? If things do not move quickly in this direction do you believe that there should be additional cuts in wages and pensions?

Thomsen: As I have said in the past, to date the authorities’ adjustment effort has focused too much on increasing tax rates on wage earners, and too little on cutting non-discretionary spending and improving tax collection. To avoid further cuts on wages and pensions, it is critical that the government moves forward on the streamlining of tax administration, as well as on other reforms that are key to sustain a return to growth, like privatizations, and in particular the dismantling of extensive barriers to competition that are still hurting the economy.

Ta Nea: The Greek government - following Troika's suggestions - is taking steps to give the state's tax administration greater autonomy to protect it from political influence. Do you think that political interventions in public administration were one of the wrongs that exacerbated the financial conditions in Greece?

Thomsen: A number of factors have affected tax collection over the years. Vested interests and inadequate political commitments, for example, have blocked reform efforts, and a lack of leadership over the last year has also had a negative impact. But the government has recognized that the lack of progress on tax administration is a serious problem, and their program now includes steps to address it. For example, revenue administration staff will be made more accountable for their performance, and greater autonomy will be given to the tax administration to protect it from political pressure. To fight corruption, stronger internal controls will be put in place, and interactions between the public and the administration will be simplified to limit opportunities for corruption. It will, of course, take time for the results of these efforts to become evident. The program will review progress during the second half of 2013.

Ta Nea: Greece’s European partners have agreed to take further steps within the program period to bring Greece’s debt significantly below 110 percent of GDP by 2022, provided Greece achieves its fiscal targets. Can Greece exit the crisis without additional support from Europe? If Greece does not eventually record primary surpluses what will be the consequences? How will the debt be operated? Is there a possibility for the IMF to leave the Greek program?

Thomsen: Our projections show that further debt relief will be needed for Europe to meet its commitment to reduce Greek debt significantly to 124 percent by 2020 and to substantially below 110 percent by 2022. Europe, for the first time, has recognized that Greece’s debt is not sustainable without transfers from Europe to Greece. As you note, the commitment is conditional on full program implementation by Greece, and we are confident that Greece will continue to meet its program targets. On this point it is worth reminding that despite fierce macroeconomic headwinds, the government has continued to meet its fiscal targets.

Ta Nea: Unit labor costs have dropped by 15 percent since their pre-crisis peak. The minimum wage has been reduced by over 20 percent, the system for setting the minimum wage has been reformed, severance costs have been cut back, and onerous pre-approval requirements for work schedules and overtime have been eliminated. Do you believe that salaries should be reduced further? Do you believe Greece will soon become more attractive for the investors?

Thomsen: Greece has made impressive progress with improving its cost competitiveness. Unfortunately, too much of this has come through nominal wage reductions, and not enough has come through stronger productivity. The program, of course, has measures to help promote deeper structural reforms—to boost productivity—and is also shifting the focus of labor market reforms to addressing Greece’s high non-wage costs. Both of these should help take the pressure off of nominal wage reductions. Nonetheless, event though the channels of cost improvements are not ideal, we are seeing them, and this is a huge potential benefit for investor interest—and ultimately employment—going forward.

Ta Nea: How much has Greece changed since 2010? What are the negative elements that continue to keep the country away from development? Can you give us some examples of areas where Greece needs to take decisive action?

Thomsen: As I have mentioned, Greece has markedly improved its cost-competitiveness. However, there is still some distance to go. Let me focus on one key area where further action is needed: opening up competition in product markets. The progress in terms of making labor costs more competitive has not yet translated into lower prices. The reason for this is that Greece has a lot of markets that are protected. The authorities need to open them, so that new entrants can force prices down. An example is illustrative of how restrictions can have a marked effect on the price of everyday products: for most categories of food sold in supermarkets, prices are higher than the European average. The government’s recent liberalization measures in this sector will hopefully address this.